Final FY 2024-25 Budget Agreement Announced & Student Housing Trailer Bill

Over the weekend, the Legislature announced a deal with the Governor on a final FY 2024-25 budget. Both houses of the Legislature will be holding Budget Committee hearings this week to review the deal, with floor votes anticipated by this Thursday, June 27. Nineteen additional budget and trailer bills have been introduced to modify the previously-adopted 2024 Budget Act (see CCFC's prior update) and to implement the budget. Please note that identical versions of each bill are introduced in both houses, with the intent to pass only one of the two bills.

The Legislature indicates that the budget protects and strengthens school funding, while preserving key social services and housing programs, which was a key point of contention between the Legislature and Governor in reaching a final agreement. The budget closes a shortfall in FY 2024-25 of over $45 billion, $17 billion of which was dispensed with through early action in April 2024. The Legislature emphasizes this deficit resulted primarily from an overstatement of the projected surplus in the 2022 Budget Act, coupled with the IRS delay of the 2022 tax filing deadline from April to November 2023. The budget includes total General Fund expenditures of $211.5 billion in FY 2024-25. The primary solutions include (but are not limited to) $16 billion in program reductions (i.e. spending cuts), $13.6 billion in additional revenues, $6 billion in reserves, and $6 billion in fund shifts. Revenue solutions include a three-year suspension of medium-sized and large businesses’ use of net operating loss (NOL) deductions and tax credits, beginning in 2024. The budget is balanced for both FY 2024-25 and FY 2025-26, while leaving approximately $11 billion in the Rainy Day Fund reserves for future use.

Proposition 98

The budget includes a modified version of a recent proposal to suspend Proposition 98. The Legislature indicates that the state budget cannot currently cover all Proposition 98 obligations over the two-year period beginning in 2022-23. As such, the budget accrues $6.2 billion that was previously appropriated to schools for 2022-23 over several years beginning in FY 2026-27 – meaning those funds will be accounted for in the “General Fund accounting ledgers” over several future years, instead of the year in which they were appropriated.

Proposition 98 is suspended in FY 2023-24 at a reduced level of $98.5 billion, creating over $8 billion of “maintenance factor” (a higher percentage of future growth than normal until the maintenance factor is paid and built back into the Proposition 98 base). Use of $8.4 billion from the Proposition 98 reserve helps to protect classroom spending despite the suspension.

Proposition 98 is funded at $115.3 billion in FY 2024-25, with an overall increase of $1.9 billion over a three-year period beginning in 2022-23 as compared to the May Revision. The budget also includes $3.6 billion in deferrals from 2023-24 to 2024-25, as well as $246 million from 2024-25 to 2025-26.

Community College Provisions

The budget includes (but is not limited to) the following provisions for community colleges:

• 1.07% cost-of-living adjustment for apportionments and select categorical programs.
• 0.5% enrollment growth.
• Deferral of $446.4 million (Proposition 98 General Fund) associated with apportionments from FY 2023-24 to FY 2024-25. Deferral of $246.7 million (Proposition 98 General Fund) from FY 2024-25 to FY 2025-26. Uses $545.9 million (Proposition 98 General Fund) from the Public School System Stabilization Account (PSSSA) to support apportionment costs in FY 2023-24, and uses $241.8 million (Proposition 98 General Fund) from PSSSA to support a repayment of the FY 2022-23 categorical program deferral in FY 2023-24.
• An expansion of nursing programs, providing $60 million each year for five years, beginning in FY 2024-25, within Strong Workforce program funding. Includes trailer bill language to develop a grant program to distribute the funding.
• Provides $20 million (one-time Proposition 98 General Fund) to increase support for the Financial Aid Administration categorical program to support students completing the FY 2024-25 FAFSA form.
• Supports the construction phase of the Siskiyou Joint Community College District, College of the Siskiyous Remodel Theater and McCloud Hall project.

The higher education trailer bill is AB/SB 155.

Student Housing

Higher Education Student Housing Grant Program

AB/SB 155 creates the statewide lease revenue bond to support 13 community college student housing projects that will convert from a cash grant to state financing (see page 37 of the bill). While complex, this proposal appears consistent with how other state lease revenue bond programs have operated. AB/SB 155 authorizes the State Public Works Board to issue up to $804.7 million in state lease revenue bonds to support the 13 identified projects. It requires specified lease agreements between the state and districts to support the projects. AB/SB 155 requires operating agreements between the State Public Works Board, Board of Governors, and participating community college that include, among other things, performance expectations of the parties related to the acquisition, design, and construction/renovation of the project.

CCFC requested additional language in the trailer bill to explicitly identify the financing framework, including the required leases and subleases. While the trailer bill was not updated to include this, CCFC has received assurance from the Department of Finance that these details should be included in the operating agreement between the parties.

Here is an overview of the financing framework, as presented by the Department of Finance at a recent Assembly Budget Subcommittee #3 on Education Finance hearing:

• The proposed state lease revenue bond program would shift the financing from General Fund support to bond financing for the college projects.
• The state lease revenue bond program will necessitate a project construction delivery agreement between the State Public Works Board (SPWB), the Chancellor’s Office, and the community college district. The college will grant a ground lease and easements to the Chancellor’s Office.
• Once the housing project is completed, the SPWB will lease the site and project from the Chancellor’s Office. The SPWB will lease back to the Chancellor’s Office, and the Chancellor’s Office will sublease it to the college. Lease payments made by the Chancellor’s Office (under the SPWB lease to the Chancellor’s Office) will secure the SPWB bonds.
• Before issuing the bonds, the SPWB will obtain interim financing for the projects. Any projects that received a funding allocation in the 2022 Budget Act will use that allocation until the SPWB can obtain interim financing, in order to cover the project’s cash flow requirements.
• Colleges will return unused funds from the 2022 allocation plus funds from the interim financing to cover the Education Code Section 17201 obligation. (This is the primary section of existing law that governs the Higher Education Student Housing Grant Program.)

Here are some of the key items included in AB/SB 155:

• Deed restriction on affordability – AB/SB 155 requires a deed restriction on the property to enforce affordability restrictions for the life of the facility. These affordability restrictions are contained in the existing SB 169 statute. CCFC asked to limit the deed restriction to the term of the state lease revenue bond repayment, but the trailer bill was not amended to do so.
• Division of the State Architect (DSA) and State Fire Marshal review – AB/SB 155 confirms that the plan review by DSA is permissive/optional, in alignment with AB 358 (chaptered in 2023), and that State Fire Marshal review is required.
• Scope adjustments – AB/SB 155 allows the SPWB to approve a reduction in a project’s bed count. A scope reduction in excess of 10% shall be reported by the SPWB to the Joint Legislative Budget Committee.
• Cash grant repayment – AB/SB 155 clarifies that colleges that already received cash for a student housing project that are subject to the state lease revenue bond conversion will not be required to revert the funding until after the community college receives proceeds from the SPWB financing program.

Revolving Loan Fund

The Legislature’s budget approves the Governor’s proposal to eliminate funding from the Student Housing Revolving Loan Fund and forego planned future funding, pending legislation to allow the program to be funded through internal state borrowing. Assembly Member McCarty is authoring AB 2076, which would transfer $200 million in FY 2024-25 from the Pooled Money Investment Account (which is administered by the State Controller) to the Student Housing Revolving Loan Fund for the purpose of funding loans to student and workforce housing projects at community colleges, UC, and CSU. These loans would be repaid at a 3% interest rate, and the principal and interest must be fully repaid by June 30, 2035. The bill is pending in Senate Appropriations Committee.

A Note on the State School Bond*

We understand that negotiations are underway for a November 2024 state school bond, with conversations occurring through the weekend and into today. The Legislature’s budget documents refer to a planned November 2024 school bond as justification for certain facility spending cuts on the K-12 side. The deadline to pass and sign a bill placing a measure on the November ballot is this Thursday, June 27. CCFC will provide additional information when it becomes available – stay tuned!

*Update 6/25/24 – We received word today that the deadline to pass and sign a bill placing a measure on the November ballot is now Wednesday, July 3, due to coordination between the Legislature and Secretary of State.

Rebekah Kalleen
CCFC Executive Director